Regulators sound warning bell on outsourcing

The financial regulators have warned there is "no lower standard" for services outsourced by companies in the industry, as they fined one bank £1.89m for "inadequate" systems and "repeat" failings in its oversight.

In a statement released by the Bank of England today (May 30) Mark Steward, executive director of enforcement and market oversight at the Financial Conduct Authority, said companies in the financial services industry are "accountable for failures" by providers to which services and systems have been outsourced.

The warning was issued following a joint investigation by the FCA and Prudential Regulation Authority in which Raphaels Bank was fined £1.89m for "inadequate" outsourcing controls which exposed customers to "unnecessary and avoidable harm".

Sam Woods, deputy governor for prudential regulation and chief executive officer of the Prudential Regulation Authority, warned outsourcing was an "important part of a firm's operational resilience".

He added: "Firms’ ability to manage outsourcing of any critical activities is a vital part of maintaining their safety andsoundness."

The regulators found Raphaels had failed to properly manage its outsourcing arrangements between April 2014 and December 2016, receiving a fine of £775,100 from the FCA and £1,112,152 from the PRA as a result of the breaches.

The bank relies on outsourced service providers to perform certain functions as part of its payment services division, but the regulators found it failed to have "adequate processes to enable it to understand and assess the business continuity and disaster recovery arrangements" of these providers.

According to the BoE's statement this morning, these shortcomings resulted in 3,367 customers unable to use their Raphaels prepaid cards and charge cards on Christmas Eve 2015 when a technology incident occurred at an outsourced card processor.

The BoE said seasonal workers, who depended on their cards to receive their wages, were particularly impacted by the incident, with the timing of the incident on Christmas Eve likely to have "exacerbated" the impact of the outage.

Mr Woods said: "This was a repeat failing which demonstrates a lack of adequate and timely remediation. This is a significant aggravating factor in this case, leading to an uplift in the penalty."

The FCA has long warned advisers to be careful when outsourcing business.

In particular, advisers must do due diligence, must ensure that they are outsourcing where possible to an authorised entity and must, above all, ensure there will be no detriment to the consumer.